Except in exceptional circumstances, a contract for the sale of land will always contain a provision requiring the buyer to pay to the seller a deposit, i.e. a percentage of the purchase price, on exchange of contracts. Both the Standard Conditions of Sale and the Standard Commercial Property Conditions provide (Condition 2.2) for a 10% deposit, to be held by the seller’s conveyancer as stakeholder (although on a sale at auction, they provide (Condition 2.3.6) for the deposit to be held by the auctioneer as agent for the seller) and to be paid to the seller on completion together with accrued interest. The payment of a 10% deposit, the holding of that deposit as stakeholder, except in the case of auction sales, and the paying of the interest on the deposit to the seller is all standard practice, but there are some exceptions to this, namely:

• in the case of residential transactions, particularly where the buyer is borrowing the whole, or 95%, of the purchase price, the seller may sometimes accept a 5% deposit only;
• in the case of very large commercial transactions, where the purchase price is many millions of pounds, the parties will sometimes negotiate a reduced deposit, perhaps 5%;
• very substantial institutional buyers, such as pension funds, generally refuse to pay a deposit, and this will normally be agreed by the seller;
• it is not the practice of the Crown or the Crown Estate to pay a deposit;
• it is not unheard of on a substantial commercial transaction for the buyer to seek to share in the interest earned on the deposit, and for this to be agreed by the seller;
• where the contract is conditional on the satisfaction of one or more conditions, and there is to be a substantial delay between exchange and completion, it is not uncommon for there to be a reduced deposit and/or for the parties to share the interest paid on that deposit. Sometimes no deposit is payable on exchange but a deposit is payable on satisfactions of the condition(s) if there is then to be a substantial delay before completion takes place.

Stakeholder or agent for the seller

Where the deposit is held as stakeholder, the stakeholder will hold the deposit on behalf of both parties and cannot pass it to either party without the consent of the other (at least pending completion or default by either party). Where the deposit is held as agent for the seller, however, the agent may pass the money to the seller at any time, and as a result, the buyer may have difficulty in recovering the deposit if the seller defaults on the sale.

Payment of the deposit in case of default

The main reason why a deposit is normally payable is because, if the buyer defaults on his purchase, the seller can forfeit the deposit and thus recover his costs, together with some compensation for inconvenience caused, without the need to resort to litigation. This is why a reduced deposit may be payable on a multi-million pound commercial transaction, since the amount of money involved may be out of all proportion to the loss which may be suffered by the seller if the buyer defaults. Indeed, if the buyer defaults and the seller is able immediately to find an alternative buyer, the deposit may be in the nature of a windfall for the seller, effectively increasing the value of his property to 110% of that value (less costs incurred in connection with the abortive sale).

Both the Standard Commercial Property Conditions (Conditions 9.5 and 9.6) and the Standard Conditions of Sale (Conditions 7.5 and 7.6) provide that if either party fails to comply with a notice to complete, the other may rescind the contract, in which case, if the buyer is at fault, the seller may forfeit and keep the deposit and any accrued interest, whereas if the seller is at fault, the buyer may recover his deposit together with any accrued interest. In each case, the wronged party retains his other rights and remedies.

However, there is a significant distinction between the two Conditions of Sale where no deposit (or a deposit of less than 10% of the purchase price) is paid and the seller subsequently serves a notice to complete on the buyer. The Standard Conditions (Condition 6.8.3) require the difference between the deposit paid (if any) and 10% of the purchase price to be paid forthwith by the buyer to the seller, but the Standard Commercial Conditions do not require this.

In the case of Aribisala v St James Homes (Grosvenor Dock) Limited [2007] EWHC 1694 (Ch), a clause in a contract purported to exclude the provisions of Section 49(2) of the Law of Property Act 1925, which gives the court discretion to order the repayment of any deposit when refusing to grant specific performance of a contract (or dealing with any action for the return of a deposit).  However, the court held that it is not possible to exclude the provisions of this Section, since the Section confers jurisdiction on the court, exercisable at its discretion, and to purport to oust the jurisdiction of the court in this way is contrary to public policy.